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Regulatory holidays all WACC'd out?

How can national regulatory authorities (NRAs) promote investment in next generation access networks (NGAs) ? It’s a common question, to which some would reply that “not interfering” would be an appropriate answer. In other words, let those who are willing to risk investment in these uncertain times exploit their investment unregulated by NRAs – let them have a “regulatory holiday” (see, for example, the explanation from our friends at Ofcomwatch).

In previous blogs we have suggested that we think regulatory holidays are a bad idea. We cannot see that regulation and investment are mutually incompatible. We believe that it is highly likely that investment in NGAs will introduce new economic bottlenecks. Where an NGA is deployed, no effective and sustainable infrastructure competition will be possible in the short or medium term. NRAs will therefore find that there will be at least some form of dominance in wholesale access to super-fast broadband. The remedy for the dominance will be the requirement to provide access at a cost-orientated price, with an allowable regulated mark-up, the old favourite Weighted Average Cost of Capital.

We consider that those who protest that investment is impossible in super-fast broadband should explain to simple regulatory lawyers such as ourselves what is wrong with the old model of wholesale access at cost + WACC? Doesn’t WACC include an assessment of risk? (See, for example, Ofcom’s statement on its approach to risk in the assessment of the cost of capital).